PENAL
CHARGES ON LOAN ACCOUNTS - ECONOMY
News:
What RBI's norms on penal
charges mean for borrowers
What's
in the news?
●
The Reserve Bank of India's (RBI) latest
guidelines on penal charges on loan accounts have come into effect recently.
RBI
Guidelines on Penal Charges on Loan Accounts:
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The norms prohibit commercial banks and finance companies from charging borrowers
penal rates on loan defaults or any other non-compliance event.
Aim:
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The key rationale of the guidelines was
that the intent of levying penal charges is meant to inculcate a sense of credit discipline, and such charges are not meant to be used as a revenue
enhancement tool over and above the contracted rate of interest.
Important
Takeaways:
●
Under the new rules, penalty, if charged,
for non-compliance of the material terms and conditions of the loan contract by
the borrower should be treated as ‘penal charges.
●
It cannot
be levied in the form of ‘penal interest’ that is added to the rate of
interest charged on the advances.
●
The material terms and conditions will be
defined as per the credit policy of the bank, and they may vary from one
category of loan to another, and from bank to bank based on their own
assessment.
●
There
is no upper limit or cap for penal charges. However, the
guidelines stipulated that the quantum of penal charges would be reasonable and
commensurate with the non-compliance without being discriminatory within a
particular loan category.
●
The guidelines had also mentioned that the
penal charges in the case of loans
sanctioned to individual borrowers
for purposes other than business will
not be higher than the penal charges applicable to non-individual borrowers for
similar non-compliance.
●
In order to prevent banks from imposing
arbitrary rates of interest, they are meant to follow a board approved policy
on penal charges on similar charges on loans.
Exceptions:
● These guidelines will not apply to credit cards, which are covered under product specific directions.